ROI-Crude oil futures separate from reality as Asia physical market buckles: Russell

By Clyde Russell

LAUNCESTON, Australia, March 12 (Reuters) - Crude oil futures prices are reflecting a view that the market can successfully navigate the Iran war, while prices for physical cargoes and refined products are signalling an imminent crisis.

Only one of these price signals is correct - and it's not what is happening in the paper oil market.

Global benchmark Brent crude futures LCOc1 ended at $91.98 a barrel on Wednesday, up 4.8% from the prior close but still down from the brief spike on March 9 that saw them reach $119.50, the highest in nearly four years.

In the physical market, the premium for a physical cargo of Middle East benchmark Dubai crude over its paper equivalent rose to almost $38 a barrel on Wednesday, the highest since Russia's 2022 invasion of Ukraine.

Paper oil traders seem to believe the rhetoric from U.S. President Donald Trump and some in his administration that the campaign against Iran is going well and there is no real threat to oil and product shipments through the Strait of Hormuz.

They also appear to believe that the International Energy Agency's release of a record 400 million barrels of crude from stockpiles will help solve some of the supply disruptions.

However, the current issues can't be solved by comments from political leaders that appear untethered from the reality on the ground, as well as a stockpile release that will probably not put enough oil in Asia, where it is needed.

While the Strait of Hormuz remains effectively blocked, the situation can only get worse and the pace at which it does so will start to accelerate.

This is especially the case in Asia, which takes most of the 18 million to 20 million barrels per day (bpd) of crude and products that flowed through the strait prior to the U.S. and Israel launching an aerial campaign against Iran on February 28.

SYSTEM BREAKING

The stress on supply chains in Asia is already becoming apparent and prices for actual cargoes of crude and refined products are reflecting this reality.

The premium for a barrel of cash Dubai crude over paper swaps jumped $4.17 to $37.87 on Wednesday, a level not seen since the Russian invasion of Ukraine, an event that also led to fears of oil shortages as Western buyers stopped buying Moscow's crude.

The difference between the Russian invasion of Ukraine and the current conflict in Iran is that in 2022, there was no real loss of supply of crude, merely a reshuffling of flows as Russian oil was re-routed to China and India.

But the current situation is vastly different, with even the re-routing of some crude exports from the Gulf to Saudi Arabia's Red Sea port and the United Arab Emirates facility on the Gulf of Oman nowhere near enough to offset the impact of the closure of the Strait of Hormuz.

It's not just a crude-supply issue that is hurting Asia, it's the emerging tightness in refined products, which is threatening to turn very quickly into a serious emergency for importing nations like Australia, Indonesia and New Zealand.

Refineries in Asia are cutting processing rates and some countries, such as China, are moving to restrict fuel exports in order to ensure they can meet domestic demand.

This is sending prices for refined products soaring, with the cash differential for diesel GO10-SIN-DIF hitting a fresh record high of $28.69 a barrel on Wednesday in Singapore.

This price reflects the premium for a physical cargo over the paper price and has surged from just 84 cents a barrel on February 27, the day before the U.S. and Israel attacked Iran.

It's a similar story for jet kerosene JET-SIN, with spot prices hitting a record high of $225.44 a barrel on March 4, before retreating to end at $157.12 on Wednesday, but this price is still 68% above the $93.45 on February 27.

What the prices in the physical crude and product markets in Asia are saying is that the supply chain is buckling and the situation will likely get worse as countries start to hoard crude and fuel.

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The views expressed here are those of the author, a columnist for Reuters.